I have always said that it is utterly absurd to watch Austrians deny the existence of aggregates. Often it is the sign of a truly infantile mind that thinks that, just because something has no concrete existence, then it must not exist.

But our universe contains a vast number of abstract things that have no concrete existence, say, like universals or numbers. For example, the number 5 has no concrete existence, but does anyone doubt that the number 5, and indeed numbers in general, are real, meaningful concepts? (of course, the advocates of the philosophical position called nominalism would dispute the idea that numbers are real, but the crude Austrians never seem even to have the wit or intelligence to frame the debate on aggregates in terms of nominalism versus realism. I take a “moderate realist” position, for the record). Do people doubt that the sum of 5, 6, 3, 4, 8, and 1 (itself a number) is not a real, meaningful concept?

Aggregates just have no concrete existence like a concrete particular, as, for example, the particular chair you are sitting on, as you read this post.

When we move to economics or finance, it is obvious how aggregates permeate everything.

A business can sell units of a good or even units of heterogeneous goods. But it can calculate value of the volume of its sales of goods as a monetary aggregate in any given period (say, the financial year or even a month or day). It is the same with the aggregated money value of purchased final goods and services throughout an economy in a given year, the aggregate that is used to express or calculate the value of aggregate demand.

Aggregate concepts are required by Say’s law: (1) the value of total factor payments considered as aggregate supply, and (2) aggregate demand as the aggregate of spending on output that has been earned from total factor payments. If aggregate concepts are invalid, then Say’s law is also invalid.

While I am pleased to see Jonathan Finegold Catalán proclaim that only crude Austrians deny the existence of aggregates, a more interesting question is whether he is willing to repudiate statements like this from the Austrian William L. Anderson:

“When Krugman uses ‘demand,’ he means ‘aggregate demand,’ which economically speaking is a nonsensical term. There is no such thing as “aggregate demand.’”

“The problem is that Krugman, as a Keynesian macro guy, cannot see anything but aggregates, which is not economics at all. There is no such thing as ‘aggregate demand’ and ‘aggregate supply,’ or at least something with such terms that can be represented in the crude ‘Keynesian Cross’ or an AD-AS graph.”

“For all of his ‘credentials,’ let us not forget that Krugman is a Keynesian who has no clue whatsoever what happens in a real economy. His world is the imaginary world of aggregates, GDP numbers, crude graphs, and no real people and certainly no real production.”

46 comments:

Those such as Callahan, Catalan and Murphy (Krugman fetish aside) should really distance themselves from the vulgar Austrians. They have done the most damage to Austrian economics out of anyone since the 1930s

Good post. Here's my favorite critique of the Austrian critique of aggregates. Austrian economics pays deep respect to the subjective orientation of market participants. Many of these participants, themselves, now think in terms of aggregate concepts. And, to add an efficient markets twist, many market participants who work with aggregate concepts, such as Goldman Sachs, seem to be doing quite well. Why haven't they been driven out of business by Austrian firms that eschew aggregate concepts?

"Why haven't they been driven out of business by Austrian firms that eschew aggregate concepts?"

Perhaps because there are no such "Austrian" firms :).

I suppose that, if a firm rejected aggregate concepts in toto, how could it even calculate income from total sales? and so on.

By the way, your blog ("Thoughts on philosophy, politics, economics, and the passing scene influenced by Keynes, Wittgenstein, Rousseau, Rawls, G.L.S. Shackle, and some others") looks of great interest.

1. There is no macroeconomics. My impression of Garrison is that he likes to use the term so that mainstream types might open their tiny minds to new concepts.

2. "Aggregates" are useful to study accumulations in economics but, except as an accumulation or a category of analysis, the total is nothing more than the sum of its parts. An aggregate of one million dogs or Vanilla Ice CDs does not transmogrify into a bulldozer with rainbow wings.

3. "Aggregate demand" may be a useful category for plutology, the study of wealth, as Mr. Catalan explained, but it becomes a nonsense term in the context of human exchange or catallactics. And other than a category for/of analysis, it is not a "thing".

While you implicitly admitted that abstract things like "aggregate demand" do not have any independent existence apart from the individual exchanges to which the abstract refers, you then claimed that aggregate demand is a "thing" after all.

In fact, aggregate demand does not have any independent existence apart from the actual existence of individual people and their individual respective demands for goods and services.

When Austrians say aggregate demand does not exist, they don't mean that the meaning of what aggregate demand refers to does not exist. They mean that it has no independent existence apart from the individual humans and their individual demands.

Remember, Austrian economics is based on individual action. To them, all existence is concretized in individual action. So when you say "aggregate demand", the Austrian are thinking "the individual demands from multiple individual people used to acquire goods and services."

If you spend $10 on a good, and I spend $10 on a good, then the real concrete existence is you spending $10 and myself spending $10. Sure, you can say there was "an aggregate of $20 spent", but that "$20 spending" has no independent existence apart from you individually spending $10 and myself individually spending $10.

Economic principles to the Austrians are based entirely on individual human action, so they are not saying that $20 of spending didn't take place. They are not saying that there wasn't a combined total of $20 spent. They are just saying that it has no ontological independent existence apart from you spending $10 and myself spending $10, and those two actions are the only relevant economic actions in this two person situation.

You're caricaturizing Anderson via ad hominem rather than understanding the philosophical underpinnings of the comments he is making.

Your response to Roddis above, that "It is a "thing" and you're a fool for making latter statement" is just mindless antagonism that doesn't constitute a sound, informed, and educated argument. It was weak.

"When Austrians say aggregate demand does not exist, they don't mean that the meaning of what aggregate demand refers to does not exist. "

Garbage. Austrians who declare it doesn't exist are obviously denying its existence in both concrete and abstract terms.

"While you implicitly admitted that abstract things like "aggregate demand" do not have any independent existence apart from the individual exchanges to which the abstract refers, you then claimed that aggregate demand is a "thing" after all."

(1) I did not implicitly admit that "abstract things like 'aggregate demand' do not have any independent existence apart from the individual exchanges to which the abstract refers" at all. I said it was an abstract thing as opposed to a concrete particular.

The sum of 4, 3, 5, and 1 is an abstract aggregate, the result of a mathematical operation on things which are themselves abstract entities.

(2) in any case, there is no contradiction.

e.g., I can refer to a crowd and look at its macro behaviour, which could manifest itself in physical ways (e.g., a stampede), but understand that the abstract entity (crowd) is composed of concrete particulars (individual people). Even if there were no actual crowds in the world (say, if the world was populated by 2 people who never met), they could still imagine a real abstract entity like a crowd.

"Remember, Austrian economics is based on individual action. To them, all existence is concretized in individual action."

Austrian economics also does macroeconomics. The Austrian business cycle theory is nothing but a macro theory.

"Economic principles to the Austrians are based entirely on individual human action, so they are not saying that $20 of spending didn't take place."

Then aggregate demand has real existence and is a valid, meaningful concept.

What your comment above shows is that you're probably unaware of the actual extreme statements made by certain Austrians denying the existence of aggregate demand.

"You're caricaturizing Anderson via ad hominem rather than understanding the philosophical underpinnings of the comments he is making."

No, I am not.

His absurd statements are repudiated even by Austrians like Jonathan Finegold Catalán:

"[sc. Anderson] ... simply said “aggregate demand” is a nonsense term. Don’t give Anderson credit where credit isn’t due, because if you do then you’re not pursuing the problem objectively. You’re defending Anderson where there is no merit in a defense. Anderson is just plain wrong — simple as that."

http://www.economicthought.net/blog/?p=997#comment-5175

"Don’t shift the goal posts. This isn’t what Anderson said,

>'When Krugman uses ‘demand,’ he means >‘aggregate demand,’ which > economically speaking is a > nonsensical term. There is no such > thing as “aggregate demand.’'

It is curious to me how the crude Austrians never seem even to have the wit or intelligence to frame the debate on aggregates in terms of nominalism versus realism, anyway.

Of course, my position above implies a kind of moderate realism.

http://en.wikipedia.org/wiki/Moderate_realism

Although it does not provide any argument for the actual truth of the moderate realist position, nevertheless Quine and, I think, a respectable body of opinion within modern analytic philosophy favours moderate realism.

You're failing to grasp the importance and implication of the word "thing" when nominalists say "there is no such thing as aggregate demand."

They do NOT mean that there is no such abstract universal called aggregate demand. They do not mean that totalling up all the nominal expenditures individuals make is meaningless or imaginary. They do not mean that aggregate demand is at best only a figment of people's imaginations.

No, they are only saying that there is no such THING as aggregate demand, apart from the actual things in question, which are the individuals and their individual exchanges of paying money for goods and services.

Remember, Austrian economics is based on individual action. All abstract universals do not have their own existence apart from the individual humans to which the abstract refers.

I see. Now you divert attention from the actual statements of your fellow Austrians like Anderson or Roddis and switch to a quite different nominalist position.

The nominalist versus realist debate as applied to existence of aggregates is not what these idiots are trying to articulate or engaging in: they making extreme statements precisely of the type like "aggregate demand is meaningless or invalid" - just as some of them attack GDP in this way.

"All abstract universals do not have their own existence apart from the individual humans to which the abstract refers."

To assert such a thing as if it is settled, universally accepted as truth or not controversial is misleading(of course, moderate realism might be challenged philosophically too).

Your assertion requires nominalism and now gets into issues of profound philosophical or ontological depth - a debate I suspect that most Austrians would be incapable of having.

As I said above, the crude Austrians never seem even to have the wit or intelligence to frame the debate on aggregates in terms of nominalism versus realism. I take a “moderate realist” position, and contend that what you say is not philosophical defensible.

Take Quine's argument for the existence of numbers, the criterion of ontological commitment

We could have a mature debate about nominalism versus realism if you like, but there seems little point, because this last comment of yours effectively concedes the essence of what I say above: that aggregates are meaningful and valid.

While aggregates like "aggregate demand/supply" certainly exist, I feel that the problem lies in thinking that having the govt manipulate these aggregates improves the welfare of individuals (for ultimately it is only individuals who can enjoy or consume anything; surely everyone agree with this).

For example: in a conceptual sense, something like "aggregate education" (the total of all learning in a country) must exist. Okay, let's say the govt decides to increase "aggregate education." This sounds nice, but in practice what could it possibly mean? How could it be achieved?

Decisions about what, when, and how to learn things are best made by individuals. Besides the absolute basics (reading, arithmetic), learning can only be meaningful if the learner himself sees the importance of the skill or knowledge in question. For me, learning Chinese might be useful, but for you it would be a waste of time. Even if you also wanted to learn Chinese, it wouldn't be productive for me or anyone else to dictate the way you learn it (self-study, 1:1 tutor, a class, etc).

I feel that individual activities to improve one's learning and activities to improve one's economic condition are similar in this respect. Decisions on what/when to consume, save, and produce are best made by individuals. While we CAN aggregate the sum of individual decisions in a country and come up with a figure, it doesn't seem useful to me. I don't want more "aggregate education"--I want the freedom to learn as I see fit! Similarly, I want the freedom to plan for my own economic well-being.

In closing, I kindly ask that you do not insult or abuse me for my views. Thank you.

"While aggregates like 'aggregate demand/supply' certainly exist, I feel that the problem lies in thinking that having the govt manipulate these aggregates improves the welfare of individuals . . ."

When the govt increases debt-financed public works expenditures, or reduces tax rates, in hopes of increasing aggregate demand, the govt isn't "manipulating an aggregate." Rather, it's changing the circumstances in which individuals make decisions. It is, after all, individuals who must still decide a) whether to spend or save their tax cut, b) whether to bid on a public works project, etc.

I do think there's a variation of your theme that's important, which is how a total quantity is actually distributed across a number of individuals. For example, some economists mock France's low rate of GDP growth compared to ours. But if you remove the top 1% of income earners in both countries, France's per capita GDP has actually grown faster than ours over a long stretch of time.

Even if you also wanted to learn Chinese, it wouldn't be productive for me or anyone else to dictate the way you learn it (self-study, 1:1 tutor, a class, etc).

I'm not sure I understand the comparison. You're saying "government tries to increase 'aggregate education' and therefore mandates everyone learn Chinese," instead of a much more sensible approach like "offers more scholarships" or "lowers the cost of public universities."

A job guarantee program would have absolutely no bearing on what goods someone would consume with their income. All it dictates is what you do to earn that money (just like any employer). But then most of the JG material I've read seems to indicate a range of possibilities.

You're saying "government tries to increase 'aggregate education' and therefore mandates everyone learn Chinese," instead of a much more sensible approach like "offers more scholarships" or "lowers the cost of public universities."

I only use Chinese as an example of how the same subject can constitute learning for one person while being quite worthless for another.

Let's use your examples. Say the govt does offer more scholarships or lowers the cost of universities. Further suppose that I am a working single mother, and I have neither the time nor money for babysitters to attend a college class. Perhaps I also don't learn well in a class environment (common for languages, I think; how much Spanish do most people remember?)

In this case we can say that while govt action may have crudely increased "aggregate education," these policies will have provided me with no personal benefit at all. However, the govt action would still have to be funded somehow. Let's assume a tax increase.

For simplicity's sake, let's say the single mother's tax burden for these new programs comes out to $150/year. She derives no benefit from this. Yet, if she had been able to use that money herself, she could have bought a $30 textbook with CDs and arranged to have a monthly 1-hour, $10 skype lesson with a Chinese college student. This format suits her schedule and learning style, and she would be satisfied with it.

When the govt takes the woman's $150 and decides to use it for scholarships or to hire an extra Chinese teacher at the local university, it is in effect saying, "If you want to derive any benefit from the taxes you paid, you must study Chinese at a university. Take it or leave it." Yet we have seen how, if given the freedom to use that money herself, the woman could have used it in a way appropriate for her situation. (cont)

"When the govt takes the woman's $150 and decides to use it for scholarships or to hire an extra Chinese teacher at the local university, it is in effect saying, "If you want to derive any benefit from the taxes you paid, you must study Chinese at a university. Take it or leave it."

This statement violates the example you committed yourself to: "Say the govt does offer more scholarships or lowers the cost of universities."

There is NO commitment for anyone to learn Chinese: they could learn anything they want.

In my example, I also said that the woman is a working single-mother, and doesn't like classroom study. So my comment still applies--she derives no benefit, despite paying taxes, yet she would have been able to gain some benefit if she had control over how to spend the $150.

(cont) Let's forget the Chinese now, and education altogether. Assume the govt wants to increase some other aggregate, such as "aggregate employment." Perhaps it decides to use a job guarantee program. I don't know specifically what this means, but I assume that such a program would also have to be funded somehow, either by taxes or govt issuance of debt (correct me if I'm wrong).

Now let's suppose that I am a small-business owner. Under normal circumstances, I only need 10 workers, but now, due to some govt enticement, I find it profitable to hire 1 new worker. Aggregate employment has gone up by one tick—wonderful. But can we now say that society as a whole is better off? Everyone must contribute taxes (or assume a part of the public debt), yet the only ones who benefit are the consumers of my product and the new worker. Even the worker himself only benefits marginally, since he must give up the opportunity cost of whatever he would have done instead (searching for a new job, moving to a city with better prospects, training himself in a new skill).

This is a Keynesian blog, so I will stop here (this post is too long already to debate multiplier effects, etc). My point is merely to show that it is possible to admit the conceptual existence of aggregates yet still insist that judging policy outcomes based solely on their effects on these aggregates can be highly problematic, since effects in the aggregate can vary wildly in how they affect individuals. And this, I feel, is what Austrians are getting at. Individuals may not have perfect knowledge of how to act optimally to enhance their well-being, but they certainly have more knowledge than anyone else, including govt.

Absent govt intervention, people will make certain decisions which they judge to be optimal. If the govt decides to increase an aggregate like “aggregate demand,” people will change their behavior in some way (they must, or otherwise there would be no point to the new govt policy). If they change their behavior from what was near-optimal, the new decisions must be, in some sense, “sub-optimal,” correct? Of course, you can say that the new decisions are now close to optimal for the changed conditions, but this avoids the question of whether changing the conditions is justified. If I point a gun at you, it may be optimal for you to give me your money, but certainly, I shouldn't be allowed to point a gun at you in the first place. Similarly, Austrians feel that, except for certain basic functions, the govt doesn't have the right to induce people to make certain economic decisions that they would not have undertaken otherwise. Not only is it morally problematic, but it also hinders people from using their intimate knowledge of their specific circumstances to find personally appropriate ways to satisfy their needs.

"Everyone must contribute taxes (or assume a part of the public debt), yet the only ones who benefit are the consumers of my product and the new worker."

You are mistaken that a Keynesian stimulus would be covered by tax increases in a recession: it would be covered by bond issues. Holders of bonds have bought those bonds freely, for a return on their money. Who are you to tell them what to do with their money?

The statement "the only ones who benefit are the consumers of my product and the new worker" is simply false. At the aggregate level, a stimulus would increase the nation's employment, output and real wealth. Income is higher. People are wealthier.

"Similarly, Austrians feel that, except for certain basic functions, the govt doesn't have the right to induce people to make certain economic decisions that they would not have undertaken otherwise."

And what decisions would that be?

(1) bond holders freely choose to buy bonds

(2) unemployed freely choose to take government stimulus jobs or jobs created in the private sector by the increase in aggregate demand

(3) if the stimulus were done by a tax cut people are free to do whatever they like with their new money.---

"You are mistaken that a Keynesian stimulus would be covered by tax increases in a recession: it would be covered by bond issues. Holders of bonds have bought those bonds freely, for a return on their money."

Look at the papers today. Last year, the Fed purchased 61% of Treasury bonds. That's not private citizens looking for a return on their money. That's the Fed trying to disguise the lack of private demand for new govt debt. At the very least, you must admit your point is not 100% true.

"At the aggregate level, a stimulus would increase the nation's employment, output and real wealth. Income is higher. People are wealthier."

Yes, I'm familiar with the idea of multipliers. I'm sure you know the broken window argument. Let's agree to disagree on this. I wrote these posts to address your belief that Austrians (and I don't subscribe 100% to that dogma) ignore the existence of aggregates.

(1) bond holders freely choose to buy bonds

This isn't always true, the Fed is also buying bonds. Also (and I know you hate ABCT), Austrians believe that Fed actions change interest rates from what they would be in absence of Fed actions, thus influencing bond buying behavior, consumer spending, and investment (and yes, I read your posts on Bob Murphy's work; I also don't believe in "one real interest rate to rule them all").

(2) unemployed freely choose to take government stimulus jobs or jobs created in the private sector by the increase in aggregate demand

But they didn't freely choose to implement the stimulus (at least not all of them did). I don't support govt stimulus, yet it happens without my consent.

(3) if the stimulus were done by a tax cut people are free to do whatever they like with their new money.

This would be the most preferable form of stimulus. But are post-Keynesians (or any Keynesians) clamoring for tax cuts? If you support lower taxes, then I'm all for it.

What is your evidence of this? Even if it were true, the Fed does not purchase them directly from the Treasury. All new bond issues found buyers.

Fed purchases are from secondary markets, and people who hold them freely choose to sell them for new money - so even here your "coercion" argument does not work.

"But they didn't freely choose to implement the stimulus (at least not all of them did)."

(1) LOL! They didn't freely choose to lose their jobs in a recession either. Funny how you don't care about that.

(2) in any case, we have a democratic system: if the majority of the voting public vehemently object to stimulus they can vote the government out. However, if you bother to take a well sampled survey of public opinion I'd suspect you'd find broad agreement for government stabilization measures, just as you do for universal health care.

"This would be the most preferable form of stimulus.

So I assume you are conceding point (3) above. Of course Post Keynesians would support tax cuts.MMTers would support broad payroll tax cuts.

"...it would be covered by bond issues. Holders of bonds have bought those bonds freely, for a return on their money. Who are you to tell them what to do with their money?"

That's funny because you're completely ignoring the fact that bond interest and principle repayment is financed by the government telling the citizens to give them their money or else, i.e. taxation. That itself is telling people what to do with their money.

Of the course those who lend to the government are not the ones personally telling others what to do with their money, but those who support it, like you, cannot possibly object to someone else's argument on the basis that what they are saying carries with it "telling people what to do with their money." You'd only be a hypocrite.

"That's funny because you're completely ignoring the fact that bond interest and principle repayment is financed by the government telling the citizens to give them their money or else, i.e. taxation. "

That is a totally different issue, which requires demolition of libertarian ethics, as I have done here:

http://www.thenewamerican.com/economy/commentary-mainmenu-43/11357-fed-is-buying-61-of-us-government-debt (link in article to original WSJ op-ed)

if the majority of the voting public vehemently object to stimulus they can vote the government out.

I believe this is a very possible outcome. After Obama wins handily this year vs. Romney, I think Rand Paul will be a major factor in 2016. One can only hope!

They didn't freely choose to lose their jobs in a recession either. Funny how you don't care about that.

On an emotional level, you're right: I don't care about aggregate unemployment. It provokes no emotional reaction in me. And I doubt that it does in you either.

My mother has Alzheimer's. It has been an emotionally wrenching experience for us. But I'm sure that you don't care one iota about that. And that's fine, b/c I think it's ludicrous to expect people to care about other people that they don't know personally.

I care about myself, my family, and my friends. Barring mass genocide or extreme natural disaster, invisible strangers in the newspaper get maybe 1% of my attention and concern. I'd be lying if I said it was more.

From an economic standpoint, I still believe elimination of centralized control over interest rates and the money supply would allow the free market to allocate resources and credit to their most productive uses, to the benefit of everyone, including the temporarily unemployed.

I assume you are conceding point (3) above. Of course Post Keynesians would support tax cuts.

I don't think supporting tax cuts is a concession on my part, as it is a move in the direction of the non-interventionist central govt that I favor. But if it puts a smile on your face, score it as a concession.

I prefer federal tax cuts in conjunction with spending cuts. But even without spending cuts, I favor tax cuts. You also support permanent federal income tax cuts? To what level--a 10% (or less) flat tax, with the majority of govt taxation and spending at the state and local level? If so, you have my complete support.

In short, your argument is almost totally worthless.

If your goal with this comment is to make me hostile to everything you say, then you've very nearly succeeded. If it's to influence my thinking in any way, this is the wrong way to go about it, imo.

"http://www.thenewamerican.com/economy/commentary-mainmenu-43/11357-fed-is-buying-61-of-us-government-debt (link in article to original WSJ op-ed)"

The statement that "Fed purchased a stunning 61% of the total net Treasury issuance" cannot be true: the Fed does NOT (repeat not) purchase bonds directly from the Treasury.

Presumably what it is trying to say is that the Fed has purchased bonds from secondary markets equivalent to the value of total net Treasury issuance: a quite different thing.

As I said above, people have freely chosen to buy new Treasury issues.

Yes, no doubt the Fed has stabilised and lowered yields and helped raise demand for new issuance - but that is just plain common sense, and the reason why the US is a sovereign nation with an independent monetary system, and not, say, like Greece.

This long diatribe is irrelevant: in fact, you could still not care about aggregate unemployment on "an emotional level" to say it is deleterious in economic terms.

The original issue was the truth of your statement: "But they didn't freely choose to implement the stimulus (at least not all of them did)."

In fact, democracy DOES allow a degree of choice in policy matters.

And even if not choosing freely to accept something were a serious argument against it, that would apply equally well to unemployment: if I didn't choose to get sacked, then how if this morally different from not choosing to implement stimulus.

"From an economic standpoint, I still believe elimination of centralized control over interest rates and the money supply would allow the free market to allocate resources and credit to their most productive uses, to the benefit of everyone, including the temporarily unemployed."

That is wholly flawed view, derived from a deficient understanding of how markets economies work.

(1) Say's law is a myth:http://socialdemocracy21stcentury.blogspot.com.au/2010/10/myth-of-says-law.html

(2) Even if there were perfect wage and price flexibility, there could still be involuntary unemployment

(3) The arguments for free trade are deeply flawedhttp://socialdemocracy21stcentury.blogspot.com.au/2011/01/mises-on-ricardian-law-of-association.html

(4) Money has special properties that mean that monetary market economies are subject to serious problems, not foreseen by neoclassical or Austrian theoryhttp://socialdemocracy21stcentury.blogspot.com.au/2011/05/keynes-on-special-properties-of-money.html

(5) Fractional reserve banking is not fraudulent or immoral: whatever pro-cyclical effects it has are a natural, endogenous part of capitalism

That is wholly flawed view, derived from a deficient understanding of how markets economies work.

What is your opinion of the Panamanian model? From what I understand, they don't have a central bank, yet they have the most successful and stable Central American economy. Is this in spite of not having a central bank?

Btw, I support free banking (like on freebanking.org), and I have no problem with fractional reserve banking.

Also, sorry for the emotional diatribe. I thought you were saying, "Don't you care about those starving unemployed folks?" or some tripe like that. I took your comment the wrong way. My apologies.

"From what I understand, they don't have a central bank, yet they have the most successful and stable Central American economy. Is this in spite of not having a central bank?"

They were hit by the global recession just like everyone else: their response was Keynesian fiscal expansion.

I am sure if you bothered to look you'd also find the usual range of instabilities and economic problems all market economies face.

Panama is also faced with a lot of poverty and extraordinary income inequality:

"Panama is one of the more unequal countries in the world. With a consumption Gini of 49 and an income Gini of 60, Panama's inequality ranks among the highest — on par with Brazil and just below South Africa, two of the most unequal countries in the world."

From IMF: "A key strength to the financial sector has been the stable banking system...The fully dollarized economy and completely open capital account have helped to keep inflation low and interest rates stable. Market discipline continues to be an important force for transparency and high operating standards, as there is no lender of last resort ordeposit insurance."

"From IMF: "A key strength to the financial sector has been the stable banking system..."

Canada with a central bank and financial regulation had an even more stable banking system than Panama.

Canada’s banking system required no bailout and had no systemic crisis in 2008/9. In 2008, the World Economic Forum ranked Canada’s banking system as the soundest in the world. The US system was ranked at number 40, and Germany and Britain ranked 39 and 44.Canada’s banks were restricted by regulators from mass securitizing of mortgage debt, and prohibited from taking on high levels of leverage to make larger and riskier loans. The Canadian mortgage industry was regulated to maintain high lending standards, instead of lax ones allowing an explosion in sub-prime mortgages:

Canada’s banks were restricted by regulators from mass securitizing of mortgage debt, and prohibited from taking on high levels of leverage to make larger and riskier loans. The Canadian mortgage industry was regulated to maintain high lending standards, instead of lax ones allowing an explosion in sub-prime mortgages

So can I get you on record to say that you believe Canada will not experience a severe correction in the housing market (a fall of 20% or greater from current levels) sometime in the next 1-3 years?

Yes, Canada has a housing bubble, but I said (1) its financial system was regulated to prevent the level of sub-prime mortgages or fraudulent loans that occurred in the US.

(2) I also said it had no financial crisis in 2008.

(3) In 2008, the World Economic Forum ranked Canada’s banking system as the soundest in the world.

All true statements.

There will be a correction of housing prices in future, as there will be in other nations like Australia.

But the scale of the Canadian bubble is hardly as great as in other nations: the ratio of house prices to income is 30% above the historical Canadian average. Ireland's, by contrast, reached 70%.

Also note:

"since banks have recourse to all of a borrower’s assets, and Canadian lending standards are stricter than America’s were, a decline in house prices would probably not wreck the banks as it did in the United States.... The inevitable landing will probably be soft. "

http://www.economist.com/node/21546057

This is typical of Austrians: your arguments are refuted time and again, and your tactic is to just switch quickly to some other subject.

The issue above was whether Panama was some extraordinary example of free market economics. It's not. Now you've switched to discussing Canada.

I never said Panama was an "extraordinary example of free market economics." I merely said that it has been remarkably stable (historic low inflation, very few bank failures) and relatively prosperous (highest growth in Americas from 2005-2010) compared to its peers in a very unstable, poor region (and LOL in comparing it to Sweden, an OECD member--how is this even remotely relevant? Apples to apples, please).

Admit it--it IS possible to have a stable, relatively prosperous (roughly on par with Turkey, and ahead of several E. European nations in PPP; not bad for a developing country), and growing economy with these characteristics: (1) no traditional central bank (with the functions of money creation, lender of last resort); (2) no deposit insurance; and (3) a purely market-driven currency (the dollar in this case).

Now you've switched to discussing Canada.

HA! YOU'RE the one who shoehorned the Canadian banking system into the Panama discussion. I wasn't saying Panama was the BEST system, just that it was a viable one that incorporated several Austrian ideas re: decentralizing monetary policy and the banking system (which you disputed; you said my views on central banking were a “wholly flawed view”; I offered a real-world, working example). Comparing it to Canada was absolutely pointless. (btw, you state: "Canada with a central bank and financial regulation had an even more stable banking system than Panama." So you admit Panama's banking system, without a traditional central bank, is stable?)

And as far being evasive goes, you still have not answered my question: When in history has cutting taxes and spending by similar amounts in the same year (or a period of several years) caused an economy to collapse, as you suggested it would? If there are such examples, I would be open to rethinking my position on tax cuts, but until you point out specific historical examples, as Lebowski said, "That's just, like, your opinion, man." Show me an example, I would honestly be interested in examining such a case.

Since you DID bring up Canada first, let's talk about it. You like the Economist? How bout these apples?

"Based on the average of [price-income and price-rent ratios], home prices are overvalued by about 25% or more in Australia, Belgium, Canada...Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble."

"Another concern is that Australia, Britain, Canada ...all have even higher household-debt burdens in relation to income than America did at the peak of its bubble."

http://www.economist.com/node/21540231

That sure doesn't sound like "the scale of the Canadian bubble is hardly as great as in other nations."

Also, you forgot to quote the best part: "As long as money stays cheap, the balloon could get bigger—perhaps big enough to become a fully fledged bubble after all." Will Canada raise rates? I think they'll opt to kick the can instead.

"I merely said that it has been remarkably stable (historic low inflation, very few bank failures) and relatively prosperous (highest growth in Americas from 2005-2010) compared to its peers in a very unstable, poor region"

(1) "relatively prosperous"?

It has already been pointed out above that Mexico has as a higher per capita GDP - Costa Rica (76 Costa Rica 11,562) has almost the same per capita PPP GDP but with much lower poverty.

Panama uses the US dollar and is nothing but an effective satellite of the US Fed: interest rates and credit conditions are affected by US factors. Furthermore, Panama's banking system is dominated by US and foreign banks, which depend on New York credit markets.

Such banks can have indirect access to the Fed as a lender of last resort.

So all this emphasis on it having no central bank is mostly a red herring.

This whole harping on the definition of "relatively prosperous" is quite irrelevant. You pursue this line as if getting me to admit that Panama does not fit your arbitrary definition of "relatively prosperous" somehow invalidates any of the possible merits of Panama's banking system. (Since you focus on this single issue, I assume that you have conceded that Panama's economy is stable and rapidly growing.)

(Incidentally, I am not 100% decided on the central banking question. While my opinion is still that central banks are not necessary, and in fact harmful, I am trying to learn more, and, unlike you, I am hesitant to make sweeping judgements that certain opinions re: the economy are "false" or "worthless." This Panama discussion started with my asking your opinion of the system, not my pronouncement that Panama had attained financial nirvana.)

Since you did mention Mexico and Costa Rica, let's look at them a bit more. Panama's per capita GDP (PPP) is about 18% more than Costa Rica. Perhaps your definition of "almost the same" is different from mine, but if a co-worker's pay were 18% more than mine, I wouldn't feel our wages were "almost the same." As for Mexico, I would say that it also is "relatively prosperous." Per capita GDP (PPP) is 50% higher than the world average of approx. $10,000. They do have terrible drug-related gang violence, but I think that's primarily due to another unwanted govt intrusion, the war on drugs (in your quest to refute all things libertarian, somehow I have the feeling you support the war on drugs).

Panama has a two-tiered economy: a modern service sector, and a poor, rural agricultural sector. No banking system in the world, central or otherwise, is going to change this fact. So your single-minded focus on per capita GDP is, as I said, irrelevant.

Panama's banking system is dominated by US and foreign banks, which depend on New York credit markets. Such banks can have indirect access to the Fed as a lender of last resort.

Looking at the following list, while there are some heavy hitters (Citi, BNP), it seems that only HSBC is the only one with a dominant presence. Lots of these banks are local or regional--is it really true that they would all be bailed out by the Fed if they were in trouble? While I think the Fed IS profligate with bailouts, I suspect getting Bernanke to write a check isn't quite so simple for these smaller players.

When in history has cutting taxes and spending by similar amounts in the same year (or a period of several years) caused an economy to collapse?

May I take your silence here to mean that you don't have any examples?

Finally, in the spirit of being open-minded, can you recommend a book (for a layman of average intelligence) to explain Post-Keynesian idea? Is Debunking Economics a good start? (though I hope you can recommend something cheaper; paying $27 for a Kindle book feels absolutely dirty, to be honest)